Aloha Thursday,

I have a friend who is an economist with a different take on the movement of future interest rates. He works in the secondary market so I take his words very seriously as he has over 20 years of experience in the mortgage trading field. Here are his thoughts:

Yesterday, the Fed kept the Fed Funds Rate steady at 0 - .25%, the lowest range ever and this was no surprise. However, they did offer some interesting thoughts, with their statement indicating that they anticipate "economic conditions are likely to warrant exceptionally low levels of the Federal Funds Rate for some time" and that "inflation pressures will remain subdued in coming quarters".

They went on to say that the Federal Reserve continues their plan to purchase large quantities of Mortgage Backed Securities to provide support to the mortgage and housing markets, and "it stands ready to expand the quantity of such purchases and the duration of the purchase program as conditions warrant". Let's hope the media doesn't spin these comments to read "this means rates will continue to drop and remain there into the Summer"...thereby creating another round of fence-sitters. We have seen this strategy to be very costly to borrowers, read on for more on this.

Many of you have been hearing and are up against the argument "I am waiting and holding for 4.5%"...but here's one reason we may not get there. Yes, the Fed has been buying Mortgage Bonds, but if you look at what they are purchasing, they are buying a lot of FNMA 30-yr 5.5% and 5.0% Bonds, which won't have much of a positive effect on present rates.

Why is the Fed buying these Bonds? Well if you think about it, it's very smart...and maybe even a little sneaky...because 5.5% bonds actually represent outstanding mortgages with rates of 6 - 6.50%, which are precisely the loans being refinanced today.

So many of the mortgages in the FNMA 5.5% pools will be refinanced and paid, thus giving the Fed a quick recoup on some of their investment. And this is likely a big reason why the Fed said they could continue this purchasing program beyond June, if necessary. So the Fed buying higher rate coupons will not necessarily get rates to 4.5%, but it should put a ceiling on how high rates can go during the near term.

Another objection could be customer greed...even though it makes sense to refinance right now, and save $250/month for example, the greed factor kicks in as clients fall in love with the thought of a 4% handle on their refinance rate, so they risk saving that $250/month in the hopes of gaining another $30. Clearly, things can turn and this window of opportunity could pass them by. But even if they are correct and are able to grab that lower rate and save another $30/month - they must be reminded that they are losing the current savings - or in the example used, $250 - for every single month they wait. So even if they get the rate they are looking for, it could take years to make up what they lost by waiting.

Rates are about even this week, having dipped on Monday and Tuesday and rising back up yesterday and today. Let’s hang on for a great ride on this rate roller coaster. Let me know if we can help in any way. Our jumbo programs are fantastic right now and we are closing a good deal of loans on the five year fixed jumbo in the low 5’s. These loans go up to $5 million.
 

-Dean